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In our role as principal auditor of the consolidated financial statements of the U.S. government (CFS), we plan to use the work of the inspectors general and contracted independent public accountants who audit the agency-level financial statements. The development of the joint PCIE/GAO Financial Audit Manual (FAM) has provided a common framework and methodology for federal financial statement auditing. Adherence to the FAM will enable us to readily review the work of other auditors as a basis for using that work under auditing standards. We want to all be on the same page so that we are in the position to use the work of the inspectors general. Certain CFS line items that will be subject to our concurrent review because of their significance, such as the federal employee and veteran benefits payable line item, involve federal agencies' significant actuarial estimations. Statement on Auditing Standards (SAS) No. 57, Auditing Accounting Estimates applies to such estimations. In addition, Statement of Federal Financial Accounting Standard (SFFAS) No. 5 requires that federal agencies disclose specific information in their financial statements for pensions, other retirement benefits, and other postemployment benefits. Additional related audit guidance was provided in November 2004 when the American Institute of Certified Public Accountants (AICPA) issued its Statement of Position (SOP) 04-1, Auditing the Statement of Social Insurance effective for periods beginning after September 30, 2005. This audit guidance discusses the auditor's responsibility under SAS No. 57 and includes specific illustrative control and audit procedures that are applicable to auditing actuarial estimates to achieve SAS No. 57 objectives. Actuarial estimates for both social security and the federal employee and veteran benefit payable line item are developed by methods which calculate for the projection period covered by an actuarial valuation, the excess of (a) the present value of projected benefits of the group included in an actuarial valuation over (b) the actuarial value of program-related assets. Although the SOP 04-1 was specifically developed for use in auditing federal agencies' statements of social insurance, we consider the internal control and audit procedures discussed in SOP 04-1 to be appropriate for auditing the significant actuarial estimates in the federal employee and veteran benefit payable line item as well. Beginning in fiscal year 2006, we plan to use SOP 04-1 as criteria in determining the extent to which we can use audit work performed by agency auditors in this area. To the extent that the concepts and objectives of SOP 04-1 are found to be appropriate to other audit areas in the future, we will consider its use in such areas.

The purpose of this letter and the enclosure is to alert the inspectors general to (1) our plan to use SOP 04-1 audit guidance in our review of agency auditors' work on federal employee and veteran benefits payable estimates that are significant to the CFS and (2) observations made during our review of selected agency auditors' work regarding such actuarial estimations as outlined in enclosure I and what additional work would need to be done to be consistent with SOP 04-1 audit guidance. We look forward to continuing to work with the federal audit community as we collectively strive to ensure the highest quality audits of federal financial statements.